First Trust Advisors has launched two exchange-traded funds (ETFs), the First Trust Horizon Managed Volatility Domestic ETF (HUSV) and the First Trust Horizon Managed Volatility Developed International ETF (HDMV).
The funds seek to provide capital appreciation while attempting to mitigate volatility using a proprietary quantitative and rules-based investment process.
The funds invest primarily in common stocks that the funds’ sub-adviser, Horizon Investments, believes exhibit low future expected volatility.
The conventional wisdom is that it pays to take chances. However, history has shown that portfolios of low-beta and low-volatility stocks have produced higher risk-adjusted returns than portfolios of high-beta and high-volatility stocks, in most major markets studied. This phenomenon is known as the low-volatility anomaly.
The low-volatility anomaly is often a product of consistent market mis-pricing due to the murky role of volatility as a stock characteristic. Mis-pricings present potential opportunity and as market conditions change, First Trust believes active portfolio management provides the ability to make the most of the opportunities the low-volatility market has to offer.
Robbie Cannon, president and chief executive officer at Horizon, says: “In this low interest rate environment, we are seeing all kinds of investors participating more and more in equity markets, even those who traditionally looked to fixed income markets. This includes not only investors in the accumulation phase, but also those in the retirement phase who are looking for yield. And while they want equity exposure, they naturally are looking for lower risk and lower volatility products. The ETFs were designed with just that in mind, given our conviction that an actively managed portfolio of low volatility stocks can produce better risk-adjusted returns than portfolios of high volatility stocks, which translates to investors as a smoother ride in equity markets.”
The fund’s portfolio managers include Michael Dickson, Scott Ladner and Steven Clark of Horizon, who share responsibilities for the day-to-day management of each fund’s investment portfolio.